When interest rates are elevated and inflation creates uncertainty, cash is king.
Buying a home requires more than a down payment. Buyers may also need money for closing costs, moving expenses, repairs, furniture and unexpected expenses after receiving the keys. Preserving some of that cash can be just as important as negotiating the purchase price.
That is why the lowest price is not always the best overall deal.
In the right situation, a buyer may intentionally offer more than a seller’s reduced asking price in exchange for seller-paid closing costs. Part of that contribution may also be used for an interest-rate buydown. When properly structured, the strategy could help the buyer keep more money in the bank without significantly increasing the monthly mortgage payment.
Can a seller pay a buyer’s closing costs?
Yes. A seller can agree to pay certain allowable costs for the buyer. This is commonly called a seller concession or seller contribution.
Seller concessions can potentially help cover eligible expenses such as lender charges, title-related expenses, prepaid taxes and insurance, and discount points used to obtain a lower interest rate.
The National Association of Realtors describes seller concessions as an arrangement in which the seller covers certain costs or fees connected to the buyer’s purchase.
The amount and permitted use of a seller contribution depend on the mortgage program, down payment, occupancy, actual closing expenses and lender requirements. The contribution must be negotiated in the purchase contract and properly disclosed.
For a seller, the decision should also be evaluated against expected net proceeds, competing listings, current buyer demand, and the overall pricing strategy. The Jacksonville seller guide and home valuation process provide additional context before making that decision.
Why would a buyer offer more than the asking price?
Consider a home that was originally listed for $350,000. After spending time on the market, the seller reduces the price to $330,000.
Most buyers would immediately focus on offering $330,000, or possibly less. But what if the buyer’s real obstacle is not the monthly payment? What if the buyer needs to preserve cash for closing and the expenses that come after purchasing the home?
The buyer might consider offering $340,000 while requesting a $10,000 seller contribution.
If the seller accepts, the property supports the higher contract price and the lender approves the structure, the seller may remain near the amount they were prepared to accept before other selling expenses. Meanwhile, the buyer may use the contribution toward allowable closing costs and an interest-rate buydown.
The buyer is not receiving $10,000 in cash. Instead, the approved contribution reduces eligible expenses the buyer would otherwise pay at closing.
Wouldn’t the higher price increase the mortgage payment?
It can, but often by less than the buyer expects.
In a simplified example, financing approximately $9,650 more with a 30-year mortgage at an illustrative rate near 6.6% could add roughly $62 per month in principal and interest. The actual difference will depend on the loan program, interest rate, down payment and mortgage insurance.
But that is only the first part of the calculation.
If some of the seller contribution is available after paying the buyer’s eligible closing expenses, the remaining amount may potentially be used to purchase discount points and lower the interest rate. The lower rate could offset some, or possibly all, of the payment created by the higher loan amount.
The Consumer Financial Protection Bureau explains that discount points involve paying more at closing in exchange for a lower mortgage interest rate. However, there is no fixed rate reduction for each point. The actual cost and benefit depend on current lender pricing.
This is why the purchase contract and mortgage financing should be evaluated together.
Cash is king after closing, too
A buyer should not empty a bank account simply to obtain the lowest possible purchase price.
After closing, a homeowner may encounter moving expenses, utility deposits, repairs, insurance changes and other unexpected costs. Maintaining available cash can provide flexibility and protection during the transition into homeownership.
For a qualified buyer who can comfortably afford the home but has limited cash available at closing, preserving several thousand dollars may be more useful than achieving a modestly lower payment.
This does not mean every buyer should offer more. It means the buyer should compare the complete transaction instead of focusing only on the advertised price.
Experience matters when structuring the offer
My real estate experience helps me recognize the negotiating opportunity. My mortgage experience helps me understand how the offer price, seller contribution and financing may work together.
Before submitting an offer, I want to identify the buyer’s actual objective:
- Does the buyer need a lower purchase price?
- Does the buyer need to reduce the cash required at closing?
- Is the monthly payment the primary concern?
- Could an interest-rate buydown improve the financing structure?
- Does the property appear capable of supporting the proposed contract price?
The best strategy depends on those answers.
A seller concession should never be treated as a shortcut around proper qualification or financial preparation. The buyer must still qualify for the mortgage and be comfortable with the final payment.
When will this strategy not work?
This approach is not appropriate for every buyer or property.
The seller must agree to the terms. The buyer must have sufficient allowable costs to use the contribution. The amount must comply with the applicable mortgage-program requirements, and the property must support the higher contract price.
Seller concessions must also be disclosed to the lender and appraiser. Fannie Mae’s appraisal guidance requires relevant financing data and sales concessions to be disclosed to the appraiser. If the property does not appraise at the contract price, the buyer and seller may need to renegotiate the price or contribution.
Current interest-rate pricing also matters. A buydown that appears useful one day may produce a different result when rates or lender pricing change.
That is why the numbers should be evaluated before the offer is submitted.
Before you offer less, compare the numbers
A lower price may be the right choice, but it is not automatically the best deal.
Sometimes a carefully structured offer can help a buyer preserve cash, cover eligible closing expenses and potentially reduce the interest rate. Even when the contract price is higher, the resulting monthly payment may remain close to, or potentially below, the payment available under the lower-price structure.
The objective is not to pay more unnecessarily. The objective is to structure the transaction around what the buyer genuinely needs.
Before You Offer Less, Let’s Compare the Numbers
Homes by Hogans can help you compare the price, estimated cash to close and projected monthly payment before you submit an offer.
Marshawn Hogans is a Florida real estate professional with Homes by Hogans, brokered by Unlock Realty, and an experienced mortgage broker. Real estate and mortgage services are provided separately. Mortgage services, when requested, are provided through Ménage Mortgage Inc., Company NMLS 2675480, Florida Mortgage Broker License MBR7673.
This article is for general educational purposes and does not constitute a loan approval, rate quote or guarantee of financing, appraisal, seller acceptance, savings or results. Mortgage rates, discount-point pricing, seller-contribution limits and program requirements are subject to change. Buyers should review the proposed transaction with their real estate professional and licensed mortgage provider before submitting an offer.